The Economic Survey 2022-23 has stated that India's reform strategy will help create public goods, improve agriculture productivity, and increase private sector participation.
The finance minister stated that the budget would facilitate ample opportunities for citizens, especially the youth, to fulfil their aspirations and provide strong impetus to growth and create jobs, while strengthening public finances.
In this note, let's assess if the budget, the main instrument for mobilising and allocating financial resources, is going to help us realise India's vision. The first question, therefore, is:
Is the budget mobilising the required financial resources to driving growth?
The Chief Economic Advisor informed us that the recovery is complete. However, we do know that we are not there. We have not yet recovered the output losses and our potential output is lower than our trend. The Survey expects the potential growth to be just 6.5%. It is, therefore, important that the government continues to take the responsibility of driving growth. Table 1 below, however, shows that the government is shying away from playing that role.
Expenditure for 2023-24, as % of GDP, is smaller than that for 2022-23
Budget for FY-24 is smaller, as a percentage of GDP, than the revised spend for FY-23. While the tax revenue (% of GDP) is marginally higher at 7.7%, the government borrowing is lower by 0.5%, implying that the government has chosen to lower the fiscal deficit.
I see no reason for doing that, as India does not have a lot of international borrowing and, therefore, any concern about our sovereign credit rating is not relevant. In any case, everyone accepts that the governments world over would have to live with higher deficit for many more years. The government could have raised another Rs 3 lakh crores by accepting a one percent increase in fiscal deficit.
Table 1: Revenue mobilisation by the Centre
Government borrowing is not likely to crowd out private investment
Any increase in government borrowing does not crowd out private investment, as the private sector is not even keen to invest, given the demand conditions. RBI's Consumer Confidence surveys have been suggesting that India has a demand problem for many years (Chart 1).
Chart 1: Consumer Confidence Survey Results
Given the household expectations about their future, I don't expect the households to rush to borrow for consumption or investment, though we have seen a very high growth in personal loans during the last few quarters.
Income tax relief is expected to provide some relief and help grow Consumption
The government does seem to know that the household and business balance sheets are still not in good shape, as it has not made any effort to raise the level of taxation. The move to provide income tax relief to low-income families is a step in the right direction, as it does improve their purchasing power. The government has also chosen to provide relief to higher income families in the form of a lower surcharge, though it has taken back some of that by taxing the insurance proceeds beyond Rs 5 lakhs.
I would have liked the government to rationalise the capital gains taxation, not to gather large revenue but to discourage speculative investments in trading real-estate and financial assets -- a move that would help align investment decision to economic needs. While the level of tax revenue (% of GDP) is still far below the pre-GFC (Global Financial Crisis) level, we can live with that for some more time (Table 1 above).
Given this understanding, I would have liked the government to borrow more and invest. Once growth in back on track, public finances would become stronger automatically. Our next question is:
Is the resource allocation strategy consistent with the government's stated objectives?
The government has been emphasising that India's growth is going to be driven by private sector consumption and investment and the government would spend in areas that have a multiplier effect. Chart 1 above informs us that the households are neither likely to drive consumption nor the investment growth. If that does not happen, the business is not likely to invest. Consequently, the 'crowding in' effect of the government investment is not expected to come in anytime soon. We would recall that the finance minister has had to exhort the industry leaders to invest, and the investments are not coming through at the desired level. I, therefore, argue that the government resources be invested to drive growth without worrying about the multiplier effect in the short run.
Creation of infrastructure and private participation
Increasing allocation to the road sector through NHAI suggests that the private sector is not likely to come forward for investing in infrastructure and other high-risk areas anytime soon. We have budgeted an investment of Rs 162,207 crores in NHAI in the coming year, against an investment of Rs 57,055 crores during 2021-22, which was in itself double the Rs. 23,891 crores it was during 2017-18. The government must continue to invest.
I also don't expect a rush of private sector investment in sectors like urban infrastructure, rural water and sanitation, railways, or defence, as these are long-gestation projects and carry much higher risk. The private sector does not participate in high-risk sectors even in the most advanced economies of the world. A McKinsey study (Bridging Global Infrastructure Gaps, McKinsey Global Institute Report, 2016) shows that nearly 90% of investment in water and sewage and transportation in the US is in the public sector.
In other words, we do not have a choice but to raise the level of public investment in these sectors. While the budget has allocated much larger amounts to roads and railways sectors, the increases have come at the cost of other sectors. For example, rural road and irrigation allocation is expected to increase by about 10% and the allocation for metro projects is lower than 2021-22 by nearly Rs 4,000 crores.
Rural and semi-urban economy and the problem of social justice
While agriculture has done well during the pandemic years, the per capita rural earnings and consumption continue to be low. We have also not been able to move rural youth to high value-adding activities in urban areas or industrial clusters. Consequently, it is important to continue allocating resources for improving the quality of life and enhancing the value of economic activity in rural and semi-urban areas.
Need to raise capital expenditure level
The combined capital expenditure for 17 ministries (the group includes large ministries like agriculture, rural development, education, Jal Shakti, public distribution) that provide support to rural and under-provided communities is about Rs 1,100 crores -- the capital expenditure for police alone is Rs 11,810 crores. Is this anywhere near being adequate?
Growth in revenue expenditure just about covers the cost of inflation
The aggregate revenue expenditure (excluding food and fertilizer subsidies) for the above-mentioned ministries is Rs 7.65 lakh crores, implying an average increase of 5.26% over the last two years. I am not comparing it with the last year, as some of the number for the last year as exactly as the budget though we are through with 10 months of the year -- implying that these are crude numbers and, therefore, best ignored. Once more, is the expenditure, spread over hundreds of schemes, adequate?
Minimum Support Price for agriculture produce subsidises the consumer
The current minimum support prices do not provide for a fair compensation for family labour and capital equipment deployed in farming activities, which implies that the food producer subsidises the food consumer.
Given the level, growth (5.26% per annum for the last two years) and the nature of allocation (low capital expenditure), it is difficult to suggest that the goal of higher agriculture productivity, inclusive growth, unleashing the potential, youth power, etc. is likely to be realised anytime soon.
In summary, I would argue that we should raise additional resources through borrowing and provide a larger allocation to meet the stated objectives. India's potential growth is not 6.5%, but closer to 8%, provided the government is willing to play the role that it is best positioned to play.